BILL ANALYSIS
AB 489
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Date of Hearing: April 16, 2001
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Louis J. Papan, Chair
AB 489 (Migden) - As Amended: April 5, 2001
As Proposed to be Amended
SUBJECT : Sub-prime and predatory lending.
SUMMARY : Regulates lending practices defined as predatory and
affects loans secured by real property which are the result of
such practices and provides remedies for the aggrieved borrowers
and sanctions for the offending lenders. Specifically, this
bill makes legislative findings and declarations:
1)Concerning the increase in the extension of credit to low
income or credit impaired borrowers especially in the form of
subprime loans secured by the borrower's equity in his/her
dwelling.
2)Recognizing that subprime lenders do offer access to capital
for borrowers who do not qualify for prime loans. However in
spite of such benefits the proposal finds that many low income
borrowers have been victimized through loans having predatory
characteristics leading to borrowers' loss of equity in their
homes.
3)Expressing the intent of the Legislature to improve consumer
protections against predatory lending practices.
Prohibits real estate brokers or agents, commercial or
industrial banks, savings associations, finance lenders and
residential mortgage lender from originating any high-cost loan
by means of any manipulative, deceptive or other fraudulent
scheme, device, or contrivance prohibited by the regulations
adopted by the Secretary of the Business, Transportation, and
Housing Agency.
Mandates the Secretary of the Business, Transportation and
Housing Agency to adopt regulations defining fraudulent
schematizations and drafting processes to curb abusive
practices related to the advertising, brokering, and making of
high-cost loans.
Adds to the Civil Code a section relating to "loan contracts,"
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"loan brokerage agreements," unconscionable conduct, consumer
remedies and sanctions against lenders.
EXISTING LAW : There are numerous federal and state statutes
that provide protections, rights and remedies to borrowers,
regulate lenders and the transactions. In Federal Law there are
several acts including but not limited to: Real Estate
Settlement Procedures Act of 1974 - see 12 U.S.C 2601; Fair
Credit Reporting Act - see 15 U.S.C. 1681; Home Mortgage
Disclosure Act of 1975 - see 12 U.S.C. 2801; Home Owners' Loan
Act - see 12 U.S.C. 12 U.S.C. 1461; and Home Ownership and
Equity Protection Act of 1994 within the Truth in Lending Act
- see 15 U.S.C. 1601.
In California some of the relevant laws are: Home Equity Sales
Contracts -- see CC 1695-1695.17; Deceptive Practices -- see CC
1770; Home Equity Loan Disclosure Act -- see CC 2970-2971;
Mortgage of Real Property -- see CC 2947-2955.5; Real Property
Loans -- see B&P 10240-10248.3; and Transactions in Trust Deeds
and Real Property Sales Contracts -- see B&P 10230-10236.6
FISCAL EFFECT : Should be offset by regulatory fees.
COMMENTS : This is a laudable undertaking since the persons most
affected by predatory lending practices are the least able to
contend with the aftermath. In addition to the federal
government and government sponsored agencies, several states and
municipalities have undertaken legislation to address predatory
lending including: New York Bill A7828; Nevada Bill A447; West
Virginia H.B. 2596; Louisiana HB 1766; New Jersey AB 3298; and
Minnesota HF 2213.
Predatory lending is usually defined by its aspects:
Home improvement scams, which are home loans stemming from
unsolicited sellers of home improvements in which the work is
generally overpriced, and rarely performed adequately;
Mortgage broker kickbacks which result in higher priced loans
than the borrowers qualify for with their lenders;
Steering to high rate lenders when consumers qualify for lower
rate loans;
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Lending to people who cannot afford to repay;
Falsified loan applications such that the loan originator pads
the borrower's income to make the loan qualify, yet which leads
to unaffordable payments for the borrower;
Incapacitated homeowners;
High interest rates which are far more than are justified by the
alleged additional risks and costs of providing credit to
homeowners with lower credit scores;
Balloon payments terms for which the borrower has no way to meet
without refinancing the loan at excessive costs or losing the
home;
Negative or non-amortizing loans, such that even after making
loan payments for years the borrowers end up owing more than was
originally borrowed;
Padded closing costs, which can often be fees for settlement
services two or three times as high as are charged middle income
homeowners;
Credit insurance packing with high priced pre-paid term credit
insurance which add thousands of dollars in unnecessary costs to
loans for borrowers who could obtain more reasonably priced
credit insurance if paid on monthly basis;
High and unfair prepayment penalties;
Mandatory arbitration clauses, which frequently require only the
borrower to submit to it and not the lender and which can force
a homeowner to pay large sums for their concerns to be addressed
by arbitrators who have no incentive to follow consumer
protection laws, and whose decisions are not reviewable by any
court;
Repeated refinancings which have the effect of bleeding the
homeowner's equity from the home by increasing the amount
borrowed exponentially in each refinancing without providing any
benefit to the borrower;
Spurious open end loans whereby the lender is allowed to avoid
making the more comprehensive disclosures required by closed end
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credit, and thereby avoid any chance of the homeowner asserting
the right of rescission, as well as completely avoiding the
restrictions under the Home Ownership and Equity Protection Act,
regardless of the cost of the loan;
Paying off low interest mortgages such as purchase money loans
with FHA with much higher interest rate loans;
Refinancing unsecured debt for which the borrower could not lose
the home, with high interest rate debt which must be paid to
avoid foreclosure;
125% loan to value loans which effectively prohibit borrowers
from selling their homes or filing bankruptcy to escape
unaffordable debt, without losing their home.
This bill is essentially an imposition of regulations and
sanctions upon practices which are in many cases the subject of
statute or common law. For example contracts are already
defined in the Civil Code and remedies are available for those
which are found to be unconscionable. Terms used in the bill,
if not defined in the bill or by reference to other statutes or
common law should be defined. Rather than amending one section
of the B&P Code and four sections of the Financial Code, perhaps
it would be more efficient to place the provisions in the Civil
Code which currently has several sections relating to loans
secured by real property. It is appropriate to focus upon the
non-depository lenders which seem to be the major source of
these loans. This could probably be achieved in simpler
fashion.
REGISTERED SUPPORT / OPPOSITION :
Support
Consumers Union
Housing California
Opposition
California Mortgage Association (CMA)
Concern
California Financial Services Association
AB 489
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Analysis Prepared by : William C. George / B. & F. / (916)
319-3081